Midcaps outshine larger peers

Mon, 4 Jan Closing

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Going full throttle in the final hours of trade today, the benchmark indices managed to break away from the range bound trade seen for most of the session today. While the BSE Sensex closed higher by around 94 points (up 0.5%), the NSE Nifty gained around 32 points (up 0.5%).

The BSE Midcap and BSE Smallcap indices managed to outshine the heavyweights and registered gains of around 1.5% and 1.6% respectively. While commodity and auto stocks led the pack of gainers, telecom and power stocks were at the receiving end today.

Barring Hong Kong, other Asian indices closed in the positive today. European markets have opened on a mixed note. The rupee was trading at 46.31 to the US dollar at the time of writing.

FMCG, particularly soap manufacturing companies, are facing the pinch of higher input costs very hard. With prices of non edible oil rising by around 10% in the last six months and no signs of abatement, the companies are planning to either hike prices of soaps in the next few months or reduce pack sizes. Most soap manufacturing companies like ITC, HUL and Godrej Consumer are getting impacted by the rise in palm oil prices as it constitutes about half the input cost for making soaps. HUL and Godrej Consumer are the largest soap manufacturers in the country with nearly 44% and 12% of the market share. Given the reluctance to hike prices at the cost of market share, the companies are expected to keep the price points intact while they will reduce the weight of soaps in the pack. While HUL closed flat Godrej Consumer closed 2% higher today.

Adding some degree of credence to India's economic recovery, the spurt in demand for steel from the automobile and infrastructure companies has made the third quarter of FY10 very buoyant for steel companies. SAIL reported a 32% YoY growth in sales in December 2009. SAIL has a market share of around 25%, producing around 13 m tonne of steel every year. This is despite the fact that most steelmakers such as SAIL, Tata Steel and JSW Steel have hiked prices by up to Rs 2,000 a tonne on the back of rise in demand. Globally steel prices have risen by US$30 to 40 per tonne to US$ 580 a tonne in the past month. Hence companies in the auto and construction sectors are believed to be building inventories expecting further upmove in prices.

As per a business daily, two major tax reforms due in 2010 promise to reduce transaction costs for importers and exporters significantly. The Goods and Services Tax (GST) regime will reduce complications and lower the compliance costs. Input costs are likely to go down further as the import duty rates come down. This is as India tries to integrate its economy with East Asian countries. Under the South Asian Free Trade Agreement (Safta), the entire neighbourhood can get integrated into a seamless market in about five years. The integration with the Association of South East Asian Nations (ASEAN) will mean that market access to these countries will progressively become easier in about seven years. As a result, movement of goods in the region will become duty-free. Given the government's ambitious target of achieving 5% of the world trade share by the year 2020 (currently 2%), these reforms will be a good start.